Estate planning is the sort of thing you may not think about all the time. But some people don’t focus on estate planning until it’s too late. According to a D.A. Davidson & Co. survey, only one in three (34%) American adults has an estate plan. So it’s important to spend time on this important aspect of your finances rather than put it off.
When it comes to estate planning, there are different tools you can use to ensure that your wishes are carried out and your assets are managed appropriately. One tool worth utilizing is a trust.
But there’s more than one type of trust to consider. The two most common types are a revocable and irrevocable trust. As you might imagine, these trusts work differently and have their own pros and cons. Let’s review each type carefully so that you can decide whether a revocable versus irrevocable trust is right for you.
How a revocable trust works
When you hear the term living trust, often, it refers to a revocable trust. A revocable trust is a legal document that you can amend as you see fit for as long as you’re alive. This means you can also revoke the trust if it no longer serves your needs.
When you set up a revocable trust, you’re typically the grantor and trustee at the same time. This means you retain full control over the trust and the assets placed in the trust. Those assets could be property, investments, or other items of your choosing.
There are some key benefits to using a revocable trust for your estate plan. First, you get the flexibility to modify the trust as you see fit. Also, having a revocable trust allows your heirs to avoid probate after you pass away.
Probate is an often-lengthy process that can delay your loved ones’ inheritance. It can also be an extremely stressful process to go through.
Plus, with probate, your will becomes a matter of public record. This means any nosy person could look up the details of your family’s inheritance. A revocable trust, on the other hand, is not subject to probate. This means a revocable trust can help your family enjoy the privacy they deserve.
That said, one drawback of a revocable trust is that it will not protect your assets from creditors. Also, there are no tax savings to be had with a revocable trust, since you still control the assets in that trust for as long as you’re alive.
How an irrevocable trust works
An irrevocable trust is basically the opposite of a revocable trust in that it cannot be changed or modified — or at least not easily. But what you lose in flexibility with an irrevocable trust, you can gain in terms of asset protection.
Since you no longer control the assets in an irrevocable trust, those assets are generally shielded from creditors. Also, assets in an irrevocable trust are generally removed from your taxable estate, which could be a big source of savings.
Plus, you can use an irrevocable trust to pass assets along to your heirs. And once again, you can avoid probate and keep your family matters private.
Some people also use an irrevocable trust to help with Medicaid or long-term care planning. Assets placed in an irrevocable trust may not count toward eligibility for Medicaid.
But because an irrevocable trust cannot be easily modified or revoked, you need to think carefully when setting one up. It’s also important to work with a qualified estate planning attorney to set up an irrevocable trust that meets your needs.
Which trust is right for you?
The type of trust you choose to set up should depend on your financial situation and goals. You may want to choose a revocable trust if you want to control your assets while you’re alive. But an irrevocable trust may be more suitable for you if you have a lot of wealth and want to reduce your estate’s taxes, you’re looking to shield assets from potential creditors, or you’re worried about long-term care.
Your best bet is to speak to an estate planning attorney to see what they recommend for your situation. An attorney can also walk you through the pros and cons of each choice so you get more clarity and can approach the decision with a lot more confidence.
At the Edwards Law Firm, we understand that decisions related to estate planning are not always easy to make. That’s where we’re here to help you every step of the way. Whether you’re leaning toward a revocable trust or an irrevocable trust, we can explain your choices to help ensure that your estate plan is complete. Contact our office today or give us a call at 904-672-7600 so that we can answer any questions you have and help you get the peace of mind you deserve.
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